Tax Reform Bill Would Cap MID for New Mortgages

The Republican leadership in the House has released its long-awaited bill to reform the nation’s tax code, and it raises significant concerns for middle-class homeowners because of limits on the mortgage interest deduction and the deductions for property taxes and state and local taxes.

“This legislation closely tracks with the House Republican blueprint for tax reform released this spring, which threatens home values and takes money straight from the pockets of middle income homeowners,” said NAR President William E. Brown. “REALTORS® believe in the promise of lower tax rates, but this bill is nowhere near as good a deal as the one middle-class homeowners get under current law. Tax hikes and falling home prices are a one-two punch that homeowners simply can’t afford.”

Based on a preliminary look at a summary of the bill, the MID cap would not affect current homeowners, but people who would become homeowners later would only be able to claim the MID ot the extent the mortgage on their primary residence is $500,000 or less. The current limit is $1 million.

In another provision, hurdles would be added to the capital gains exclusion most home sellers can take on the sale of their principal residence. Currently, the limit is $500,000 for a married couple filing jointly. The bill would eliminate the deduction for state and local income taxes. And while taxpayers would continue to have the option to deduct their property taxes, the deduction would be capped at $10,000.

Tax Brackets Consolidated

The bill, called the “Tax Cuts and Jobs Act,” would consolidate today’s seven tax brackets into four: A top rate of 39.6 percent for the highest earners, which is unchanged from the current top rate, and three other brackets with rates of 12, 25, and 35 percent.

In addition, the standard deduction would be almost doubled, to $24,000 for a married couple filing jointly, and half this amount for single filers. However, the personal exemption and exemptions for dependents would be folded into that higher deduction, negating most of its benefits, especially for larger families.

For businesses, the framework calls for lowering the top corporate rate to 20 percent from 35 percent. It would lower the top tax rate for so-called “pass-through entities” to 25 percent. Pass-through entities are taxed through the individual code and include limited liability companies, S corporations, and partnerships such as law firms and investment groups. Rules are included to limit who would get the 25 percent pass-through rate. Other provisions would affect expensing of some depreciable business assets and the deductibility of interest on business loans for corporations.

Changes to the bill could be made before it’s formally taken up in the House Ways and Means Committee, which is expected to happen on Monday. Senate consideration could soon follow.